UPDATE 1-CSX, hedge funds face off in U.S. court
(Adds additional details from trial, paragraphs 10-14, updates stock price)
By Martha Graybow
NEW YORK, May 21 (Reuters) - The chief executive of CSX Corp (CSX.N) said in court on Wednesday he felt targeted by activist investors seeking to get seats on the board of directors, but the rail company negotiated with them in good faith to try to find common ground.
CSX sued The Children's Investment Fund Management, a hedge fund known as TCI, and another fund, 3G Capital Partners, in March, contending they violated securities laws in their efforts to nominate a slate of directors for election at the company's annual shareholder meeting.
The funds are trying to get five directors onto the 12-member CSX board.
But CSX wants the court to block the funds from nominating their slate, bar them from voting some of their shares and force them to sell part of their CSX stake.
TCI and 3G deny CSX's accusations. In counterclaims, they accuse the railroad of securities law breaches including illegally enriching corporate directors. They say CSX engaged in bad faith discussions with TCI and that the company has sought to stifle dissenters seeking to shake up the board.
Under questioning in U.S. District Court in Manhattan at the start of the civil trial, CSX Chairman and CEO Michael Ward said he and presiding director Edward Kelly negotiated in good faith during discussions with money manager Christopher Hohn of TCI in January 2008.
When asked whether he felt he was a target of the investors, Ward said, "I do feel targeted by TCI, yes," and believed that the fund had intended to remove him as CEO.
"They've expressed that in prior meetings with Mr. Kelly," Ward said.
The trial is being heard by U.S. District Judge Lewis Kaplan without a jury. Oral testimony is expected to conclude on Thursday, with a decision expected from the judge before CSX's annual meeting on June 25.
WASHINGTON STRATEGY
The funds contend that Ward and others at CSX had a clear strategy to quell the dissenting shareholders, introducing handwritten notes in court that Ward wrote in January discussing strategies and tactics to deal with the activists.
"You stated that the issue was how to deploy offense and defense with the goal of zero dissidents, right?" Peter Doyle, a lawyer for 3G, asked Ward.
"Yes," the CEO replied.
Among the tactics mentioned in one note was a so-called "Washington strategy," referring to a hearing before a congressional subcommittee discussing railway investments, that Ward said on Wednesday was aimed at making it less attractive for other stockholders to align themselves with TCI.
Ward also was asked about a suggestion by TCI in 2007 that the company consider a leveraged buyout. Ward said he "did not think that was a wise course of action," but under questioning said CSX did discuss last year a potential relationship with a private equity firm.
TCI has formed a shareholder group with 3G. It says that the funds and their board nominees collectively own 8.7 percent of CSX's outstanding stock. Including swap contracts, the investment equates to a stake of 12.3 percent, according to TCI, a $15 billion fund based in London.
INVESTOR ACCUSATIONS
The investors have accused CSX of awarding stock grants to senior executives a week before announcing a $1 billion increase in its stock repurchase plan, a dividend increase, and optimistic earnings forecasts.
In a letter to CSX shareholders on Tuesday, TCI said the railroad could achieve $2.2 billion in annual productivity gains within five years, far more than the $400 million the company has targeted. The fund cited improvements such as improving scheduling and yard operations, cutting engine maintenance costs and boosting labor efficiencies.
The investors said in the letter that no incumbent directors or senior CSX executives have bought CSX stock in the open market with their own money in recent years, and that executives have actually been reducing exposure to the shares.
In response, Jacksonville, Florida-based CSX said it has held several meetings with TCI and is responsive to constructive ideas from shareholders.
"However, the TCI Group has offered an endless stream of ill-conceived suggestions -- including an LBO at $50 per share and a 'junk' recapitalization -- which, if implemented, we believe would be damaging to the company and would deprive shareholders of significant value," CSX said.
CSX shares ended up 1.7 percent at $68.85 at the close of regular trading Wednesday on the New York Stock Exchange. (Reporting by Martha Graybow; Editing by Tim Dobbyn)
